Under the Federal Power Act, federally regulated electric utilities must obtain FERC's approval before changing the rates they charge to wholesale and retail consumers. This case presents the question whether a different provision of the Act requires utilities to obtain similar "pre-approval" before modifying the depreciation rates they use for accounting purposes. Petitioners contended unsuccessfully before the Commission that the statutory provision does not impose such an obligation. We agree with petitioners that the Commission unreasonably read the statute, and accordingly we vacate the orders under review.
Electric utilities incur expenses in producing power, but regulators do not permit every sort of expense to be recovered immediately — nor should they. It would make no sense to allow a utility that constructs a power plant for $100 million to set rates high enough to recover that expense over the course of one year. Although the plant will deteriorate from use from year to year, the plant might last for 20 years or more, and its cost should be recovered over the course of that useful life.
Depreciation charges are the means by which a utility recovers over time the capital invested in the facilities or plant used in producing power. Because a higher depreciation charge implies that the utility should be permitted a higher rate (and conversely a lower depreciation charge implies that the utility should be allowed a lower rate),
Where depreciation accounting is not implicated in a ratemaking proceeding, however, it appears that the Commission has not attempted to regulate it. That is not to say that the Commission lacks the statutory authority to do so. Apart from its duties regarding the rates utilities may charge for their service, the Commission has been delegated authority over accounting procedures per se. Section 301 of the Act addresses record keeping generally, requiring utilities to keep "such accounts ... as the Commission may by rules and regulations prescribe as necessary or appropriate for the purposes of the administration of this chapter" and authorizing the Commission to inspect such accounts at all times. 16 U.S.C. § 825(a)-(b) (1994). Pursuant to this authority, the Commission adopted in 1960 the Uniform System of Accounts, 18 C.F.R. pt. 101 (1998), a comprehensive classification and enumeration of revenue and expense items that utilities must use in keeping their books. Yet although the Uniform System of Accounts defines "depreciation," 18 C.F.R. pt. 101, Definition 12, and sets forth the components of the depreciation account, id. at Item 108, nowhere does it prescribe a depreciation method or fix depreciation rates. See OFFICE OF CHIEF ACCOUNTANT, FEDERAL ENERGY REGULATORY COMMISSION, ELECTRIC UTILITY DEPRECIATION PRACTICES, 1976, at 1 (1980) ("The Uniform System of Accounts requires depreciation accounting but prescribes no particular depreciation method.").
Section 302's dormancy ended in 1994, however, when the Commission, responding to Midwest Power's unsolicited letter informing the Commission of its intention to change its depreciation rates, declared that it was "inappropriate for [Midwest Power] to reduce its depreciation rates for accounting purposes without a corresponding change in the depreciation rates embedded in its wholesale and retail electric rates." Midwest Power Sys. Inc., 67 F.E.R.C. ¶ 61,076, at 61,207 (April 19, 1994) (quoting 1994 Letter Order from FERC's Chief Accountant) (internal quotation marks omitted) (alteration in original).
When Midwest Power obeyed this order and filed a request for authorization to reduce its annual composite depreciation rate, the Commission dismissed the request as moot — changes made before April 19, 1994 (the date of FERC's Midwest Power order) were retroactively accepted if based on sound accounting practices — but did not offer further justification for the new pre-approval system. MidAmerican Energy Co., 79 F.E.R.C. ¶ 61,169, at 61,794 (May 15, 1997).
The Commission rejected Southern's arguments and denied the request for rehearing. Pointing to the same language in § 302(a) that it had emphasized in its April 1994 order, the Commission concluded that § 302 is not merely an enabling provision, but rather expressly imposes a pre-approval requirement. Id. at 61,328. The Commission responded to Southern's APA objection by characterizing the May 1997 order as an "interpretative" rule exempt from the APA's notice and comment procedures; in the Commission's view, the May 1997 order "did little more than reiterate the statutory obligation imposed on public utilities and licensees by Congress in 1935." Id. As for Southern's claim that the Commission violated § 302(b) by not providing notice to the State commissions prior to issuing the May 1997 order, the Commission maintained that it did send the May 1997 order to the State commissions after issuance and that no State commission had responded or indicated any objection to the order. Id. at 61,327 n. 11. Southern and the other intervenors before the Commission now petition us for review of the May 1997 and October 1997 orders.
Before deciding whether § 302(a) requires utilities to gain the Commission's approval before changing their depreciation rates for accounting purposes, we see an initial weakness in the Commission's position: its apparent failure to comply with § 302(b). Section 302(b) provides:
16 U.S.C. § 825a(b) (emphasis added). Petitioners argue that the Commission neglected to provide the requisite notice to the State commissions before issuing its May 1997 order, and that the May 1997 order and the October 1997 order justifying the May 1997 order are therefore invalid. The Commission responds that it complied with § 302(b) by publishing the May 1997 order in the Federal Register after it was issued, see 62 Fed.Reg. 28,015 (May 22, 1997), and by sending the May 1997 order to the State commissions before issuing the October 1997 order.
We think it obvious that the Commission did not comply with § 302(b). The Commission identified its May 1997 order as a "rule" in its October 1997 order, in its brief, and at oral argument. See, e.g., MidAmerican Energy Co., ¶ 61,081, at 61,328 (emphasis added) ("[W]e believe that the May 15 order properly may be characterized as an `interpretative rule.'"). In doing so, the Commission has hoisted itself on its own petard, for § 302(b) requires the Commission to notify the State commissions "before prescribing any rules." 16 U.S.C. § 825(a)(b) (emphasis added). Publishing the May 1997 order in the Federal Register and notifying the State commissions after issuing the May 1997 order do not satisfy that requirement. The Commission's neglect of § 302(b) suffices for us to hold the May 1997 and October 1997 orders invalid.
Alternatively, the Commission contends, rather obliquely, that any failure to comply with § 302(b) was harmless in light of the absence of response or objection from a single State commission since the State commissions received notice — albeit tardy — of the May 1997 order. We say "oblique" because the Commission neither cited the APA's harmless error rule nor explained why a State commission's failure to object after receiving a belated notice necessarily implies that no harm was done.
Finally, we should note that the Commission's characterization of its May 1997 order as an "interpretative rule"
Although we could rest on our determination that the Commission's May 1997 order violates § 302(b), we think it appropriate to consider alternatively petitioners' more substantive argument — that the order is simply not authorized under § 302(a). Petitioners and the Commission, not atypically, both claim that the plain language of the section supports their respective readings and therefore ends our analysis. See Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). We set out § 302(a) in full:
16 U.S.C. § 825a(a).
As it did in its October 1997 order, the Commission emphasizes the portion of
Although the language of § 302(a) is not pellucid in all respects, we agree with petitioners that it is clear on the discrete issue presented in this case — whether § 302(a) is a self-executing statute or merely an enabling statute. A careful reading reveals that Congress did not establish any self-executing requirements for utilities to follow. Rather, Congress intended to grant the Commission the authority to regulate depreciation accounting by utilities.
We think the Commission's paraphrase of the section that a utility may only use depreciation rates prescribed by the Commission may be misleading. The structure of the section seems to speak in terms of prescribing general rules and fixing the rates of individual utilities. The first sentence of § 302(a) authorizes the Commission, after holding a hearing, to "require ... public utilities to carry a proper and adequate depreciation account in accordance with such rules, regulations, and forms of account as the Commission may prescribe." 16 U.S.C. § 825a(a) (emphasis added). Here Congress spoke in permissive terms — using "may" rather than "shall" — and established the procedural prerequisite of a "hearing," thereby contemplating that positive action by the Commission, rather than the language of § 302 itself, would underlie the actual regulation of utilities' depreciation accounting. Although we need not decide the issue, it appears that Congress here contemplated a general rulemaking authority for the Commission. The verb "prescribe" — meaning "to lay down ... [a] rule," WEBSTER'S NEW INTERNATIONAL DICTIONARY 1954 (2d ed.1934) — as well as the words "rules" and "regulations" illustrate that Congress intended to authorize the Commission to promulgate rules and requirements generally applicable to all utilities. For example, the Commission might promulgate a rule that utilities must follow generally accepted accounting principles, or the Commission might set a rate of depreciation (for a class of property) applicable to all utilities.
The second sentence of § 302(a) provides that "[t]he Commission may, from time to time, ascertain and determine, and by order fix, the proper and adequate rates of depreciation of the several classes of property of each licensee and public utility." 16 U.S.C. § 825a(a) (emphasis added). Like the first sentence, it is phrased to enable the Commission to regulate rather than to impose self-executing requirements. Although, again, we do not say definitively, Congress here seems to have contemplated a more specific type of regulation: case-by-case, utility-by-utility adjudication of rates of depreciation as opposed to generally applicable rules governing accounting practices or generally applicable rates. This is suggested by Congress' use of the verb "fix" — meaning "to assign precisely," WEBSTER'S NEW INTERNATIONAL DICTIONARY 958 (2d ed.1934) — rather than "prescribe," and the words "order" and "each licensee and public utility."
Nor does the fourth sentence — on which the Commission stakes its argument — support the notion that § 302 itself establishes a pre-approval requirement. It provides that "[t]he licensees and public utilities subject to the jurisdiction of the Commission shall not charge to operating expenses any depreciation charges on classes of property other than those prescribed by the Commission, or charge with respect to any class of property a percentage of depreciation other than that prescribed therefor by the Commission." 16 U.S.C. § 825a(a).
In any event, whether or not the section mandatorily divides Commission regulation into discrete rulemaking and adjudication spheres, we think petitioners are correct that it is not self-executing. Even if the term "prescribe" in the fourth sentence could be read as applying to the Commission's setting of an individual utility's depreciation rates, that sentence clearly calls for the Commission to take some action with respect to rates of depreciation before a utility is under an obligation not to alter those rates.
Another provision of the statute supports our reading of § 302. When Congress amended the FPA in the Public Utility Act of 1935, it added not only § 302, but several other provisions, among which was § 205(d). Public Utility Act of 1935, ch. 687, Title II, sec. 213, § 205(d), 49 Stat. 803, 851-52 (1935) (codified at 16 U.S.C. § 824d(d)). Section 205(d), part of a provision dealing with the
16 U.S.C. § 824d(d) (emphasis added). In contrast to § 302(a), § 205(d) does impose a self-executing requirement on utilities: utilities must file their proposed rate schedules with the Commission and may not implement those changes until at least 60 days after filing.
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We should make clear the limitations of our holding. It may be that the Commission could, pursuant to its authority under the first sentence of § 302(a) to prescribe generally applicable rules relating to depreciation accounting, promulgate a substantive rule requiring utilities to obtain approval from the Commission before changing their depreciation rates for accounting purposes. In promulgating such a rule, the Commission would of course have to comply with the "hearing" prerequisite of the first sentence of § 302(a), with § 302(b)'s requirement of advance notification to State commissions, and with the notice and comment procedures set forth in 5 U.S.C. § 553. And the Commission's rule would still have to withstand scrutiny under the Chevron framework. But the "precise question at issue," Chevron, 467 U.S. at 842, 104 S.Ct. 2778, would be different from what it was in this case. Instead of asking whether § 302 itself requires utilities to gain the Commission's approval before changing their depreciation rates, we would ask whether § 302 forbids the Commission from imposing such an obligation on utilities — or at least whether § 302 is ambiguous in that respect. We do not decide that question.
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For the foregoing reasons, we grant the petition for review, vacate the Commission's May 1997 and October 1997 orders, and remand for proceedings not inconsistent with this opinion.